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									BHP Billiton Ltd (BHP)
Recommendation: Accumulate (previously Hold)                                                         2 February 2010
Recommendation upgrade. Prefer BHP to Rio Tinto.
     At $39.20/share (open on 2 February 2010: $40.49), our recommendation for BHP is upgraded from
      Hold to Accumulate following the fall in BHP’s share price, continuing supportive economic releases (eg
      China data, US ISM manufacturing index) and our previous advice on 21 January 2010 that we prefer
      BHP to Rio Tinto (RIO, $67.41, Hold). This latter view was based on the respective iron ore sales mix
      advised by both companies in their quarterly reports: (BHP has 46% of iron ore sales based on shorter
      term reference pricing); RIO’s outperformance relative to BHP over the past six months; and, in the
      event that there are substantial curbs to credit growth in China, BHP has less downside risk relative to
      its peer group (due to its unrivalled balance sheet strength, operating cash flow).
     In its iron ore business, BHP (on 29 January 2010) has pre-approved US$1.93 billion of early capital
      expenditure for the company’s Rapid Growth Project 6 (RGP6) in the Pilbara.
     BHP’s December Quarter Production Report (released 20 January 2010) was mixed, but had some key
      positive features (primarily iron ore sales pricing basis; also iron ore production, copper concentrate
      provisional pricing).
     For the half year ended December 2009, 46% of BHP’s WA Iron Ore shipments were based on shorter
      term reference pricing (quarterly, spot or index pricing basis), which was higher than we would have
      expected. We upgraded our current year earnings estimate for BHP by 5% to US$10.9 billion, largely
      due to the change in iron ore sales mix.
     Overall, we remain somewhat cautious on the outlook given: base metals prices have been - and still
      are - above levels that could be justified from fundamentals; and recent cautious comments from both
      BHP and RIO. Any further strengthening in the US$ relative to the Euro (on concern over sovereign
      debt issues) is likely to constrain base metals prices.

         Share price:                            $39.20
         Market Capitalisation:                  A$218b
         Year ending 30 June                       2008            2009           2010      2011        2012
                                                     Act             Act            Est       Est         Est
         Attributable Profit (US$m) 1             15,368          10,722         10,877    15,292      17,194
         EPS (UScps)                               274.9           192.7          195.6     275.0       309.2
         DPS (USc)                                  70.0            82.0           86.0      92.0        96.0
         Attributable Profit (A$m)               17,181          14,373          12,086    16,991     20,968
         EPS (Acps)                               307.3           258.3           217.4     305.6      377.1
         P/E ratio (x)                              12.8            15.2            18.0      12.8       10.4
         DPS (c)                                  78.84           110.0             95.6    102.2      117.1
         Franking (%)                             100%            100%            100%      100%       100%
         Net Yield (%)                             2.0%            2.8%            2.4%      2.6%       3.0%
         $A/US                                     0.895           0.746          0.900     0.900       0.820
         Aluminium (US$/lb)                         1.21            0.85           0.87      0.91        0.95
         Copper (US$/lb)                            3.50            2.23           2.95      3.15        3.10
         Oil (WTI US$/bbl)                            97              68             74        87          89
             2009: Attributable Profit including exceptional items: US$5,877m.
BHP Billiton Ltd

Iron Ore – Early approval for RGP6                        Other Business Units

BHP has pre-approved (on 29 January 2010) US$1.93         Positive production performances included: record
billion (BHP Billiton share US$1.73 billion) of early     quarterly iron ore production, up 8% compared to
capital expenditure for the company’s Rapid Growth        the September quarter; a strong petroleum
Project 6 (RGP6). RGP6 is expected to increase            production performance; and recoveries in nickel and
installed capacity at the company’s WA Iron Ore           manganese ore and alloy output.            However,
assets to 240mtpa during the 2013CY.                      metallurgical coal production was down 5%.

The funding will allow early procurement of long lead     Total Petroleum Production in the December quarter
time items and detailed engineering to continue the       was down 7% against a strong previous quarter due
expansion of the inner harbour at Port Hedland,           lower seasonal demand in eastern Australia and
progress rail track duplication works and expand the      planned downtime at Mad Dog and Atlantis in the
Jimblebar mining operation. The approval for the          Gulf of Mexico. However, December half output of
balance of the RGP6 capital will be considered during     79.75 million boe was up 17% on the pcp due to the
the second half of the 2010 calendar year (likely total   ramp up of Shenzi (USA), strong reservoir
cost: >US$4b on a 100% basis).                            performance from Atlantis and no weather related
As part of the binding agreements on the proposed
iron ore production JV, Rio Tinto will have the option    The finalisation adjustment (for 2009FY copper
to participate in RGP6 by paying its share of invested    concentrate sales) plus the provisional pricing impact
capital; with this decision being made after the Joint    for copper sales as at 31 December 2009 will increase
Venture transaction is completed (estimated in the        BHP’s half year earnings by US$467m.
December half 2010).                                      Nickel production was higher than all comparative
                                                          periods (December quarter: +38% compared to the
December Quarter Production Report                        September quarter).
Iron Ore                                                  Manganese ore and alloy production is ramping up
                                                          with improved demand, which will also benefit OM
BHP reported record quarterly iron ore production, up
                                                          Holdings (OMH, $2.00, Accumulate).
8% compared to the September quarter (RIO iron ore
production on same basis: -1% including IOC)              Metallurgical Coal production was down 5% for the
through the utilisation of rail and port infrastructure   quarter and perhaps weaker than anticipated,
improvements as part of Rapid Growth Project              although quarterly shipments were up in response to
(RGP) 4. Ramp up of RGP4 is continuing with full          strong demand.
capacity expected to be achieved by the end of
                                                          BHP’s announcement of US$240m pre-approved
calendar year 2011. Including RGP4, BHP’s full
                                                          expenditure on the Jansen Potash Project in
installed capacity across the WA Iron Ore operations
                                                          Saskatchewan, Canada (final investment decision: late
will be 155mtpa (100% basis).
                                                          2011) should reduce/dispel speculation regarding a
For the half year ended December 2009, 54% of             possible large BHP acquisition in this space eg
BHP’s WA Iron Ore shipments were based on annually        Potash Corp of Saskatchewan (>US$34 billion) or
agreed pricing (2009 fines benchmark price US$60/t        Mosaic.
FOB, 62% Fe), with the remainder sold on shorter
term reference pricing ie 46% of sales were on a          In its brief market/outlook comments, BHP noted
quarterly, spot or index pricing basis (spot iron ore     the strong price recovery during the quarter across
                                                          the commodity suite, driven by demand in China and
fines price, 15 January: US$135/t cif China). The
                                                          restocking in the developed world. Going forward,
proportion of sales on shorter term reference
                                                          “the speed of recovery in the developed economies
pricing is higher than we would have expected (and
                                                          remains uncertain, particularly considering the
compares with 30% of sales reported in July).
                                                          eventual withdrawal of government stimulus. In
We estimate that, for a six month period (December        China the impact of measures to control loan growth
and March quarters) BHP’s earnings would benefit          will add another future variable” (noted in our PWW
by ~US$800m with this pricing mix relative to the         last week). “Consequently we expect some degree
2009 contract or provisional prices (or ~US$278m          of volatility in the short term outlook for our
compared to 30% of sales on shorter term                  commodities.” We have a similar view.
reference pricing). This was the key positive for
earnings estimates in the report.
                                                                                                    BHP Billiton Ltd

Final Result
Full year attributable profit, excluding exceptional      Profit/(Loss) US$m            2007     2008      2009
items, of US$10.722 billion (2008: US$15.368b)            Revenue (incl jv & assoc)   47,473    59,473    50,211
was slightly above market expectations.                   Underlying EBIT             20,067    23,497    18,214
                                                          EBIT - from operations      18,401    24,145    18,214
Underlying EBIT for 2009 (refer to chart below) was
                                                          Net interest expense           -390     -662      -543
down 25% to US$18.2b (2008: US$24.3b) due to
                                                          Profit before tax           18,011    23,483    17,671
the following influences:
                                                          Total tax expense            -4,515   -7,521    -6,432
     Lower sales volumes (largely in Base Metals         Outside equity interests        -80     -572      -517
      and Manganese) reduced Underlying EBIT by           Attributable Profit         13,416    15,390    10,722
      US$2.5b. Copper sales volumes were impacted         Exceptional items               259       22    -4,845
      by lower ore grade and reduced output from          Profit excl Exceptionals    13,675    15,368     5,877
      milling operations at Escondida.
     Lower average realised prices (particularly for
      crude oil, copper, nickel, aluminium, alumina       Underlying EBIT (US$m)       2007      2008      2009
      and diamonds) reduced Underlying EBIT by            Petroleum                    3,014     5,489     4,085
      US$4.0b.                                            Aluminium                    1,856     1,465       192
     Costs increased by US$2.5b with the bulk of         Base metals                  6,875     7,989     1,292
      the cost increases in the first half.               Diamonds & Spec. Prod.         197       189       145
      Discretionary costs previously incurred to          Stainless Steel Materials    3,675     1,275      -854
      maximise production to realise high prices were     Iron Ore                     2,728     4,631     6,229
      reduced. The benefits of falling input prices (eg   Manganese                      253     1,644     1,349
      caustic soda) will generally be lagged and          Metallurgical Coal           1,247       937     4,711
      realised from the current December half.            Energy coal                    481     1,057     1,460
     Despite the recent strength in the A$ and the       Group & unalloc. Items        -259      -394      -395
      Rand, exchange rate movements increased             BHP Billiton (total)        20,067    24,282    18,214
      Underlying EBIT by US$2.5b over the 2009FY.

        (a) Including impact of price-linked costs.

Exceptional items totalled US$6,054b (pre-tax) and        costs relating to the lapsed offers for Rio Tinto
US$4,845b (after-tax). BHP had announced (in the          (pre-tax charge: US$450m).
interim results release in February 2009) the planned
                                                          Net operating cash flow was up 6% to a record
indefinite suspension and writedown of the
                                                          US$18.9b, due to the strong December half
Ravensthorpe Nickel Operation to zero (updated
                                                          (US$13.1b). BHP’s cash flow priorities remain
pre-tax impairment charges: US$3.615b), plus the
                                                          unchanged – maintain the balance sheet, invest in
BHP Billiton Ltd

organic growth, participate in opportunistic mergers               US$9.5b (2009: US$10.6b). If the proposed WA Iron
and acquisitions and (then) return surplus cash to the             Ore Joint Venture payment (US$5.8b prior to a
shareholders.                                                      material adjustment) is added to this total, the spend
                                                                   is then comparable to the market capitalisation of
Summary Cash Flow (US$m)                         2008      2009    companies like Alcoa Inc.
Operating cash flow & jv dividends             25,199    25,212
Net interest paid                                 -630      -314   Summary Balance Sheet (US$m)                 2008     2009
Tax paid                                        -6,752    -6,035
                                                                   Cash                                         4,237   10,833
Net operating cash flow                        17,817    18,863
                                                                   Inventory                                    5,203    5,021
Capital expenditure and financial investment    -7,558    -9,492   Property, plant & equipment                 47,332   49,032
Exploration expenditure                         -1,350    -1,243   Other                                       19,117   13,884
Purchases of investments                          -336      -593
                                                                   Total Assets                                75,889   78,770
Sale of fixed assets & investments                 180       277
                                                                   Interest Bearing Liabilities                12,695   16,419
Net cash flow before dividends & funding         8,753     7,812
                                                                   Provisions                                   7,847    8,919
Dividends paid                                  -3,250    -4,969   Other                                       16,304   12,721
Net cash flow before funding                     5,503     2,843
                                                                   Total Liabilities                           36,846   38,059
                                                                   Net Assets                                  39,043   40,711
The Group’s financial strength – gearing (net debt/net             Gearing: Net Debt/(debt+equity)             17.8%    12.1%
debt+equity) reduced to 12.1% at 30 June 2009 (30                  EBITDA interest cover (excl exceptionals)    49.4x    56.8x
June 2008: 17.8%) - had been a clear competitive
advantage during the severe global economic                        Commodity Outlooks
downturn. However, few Tier One assets became
available during the global financial “squeeze” (the               In China in particular, re-stocking coupled with
apparent duration has been shorter than BHP                        stimulus package spending, fuelled strong real
expected). This is relevant in the context of press and            demand in key commodity-intensive industries such
other commentary suggesting that BHP has missed                    as infrastructure, construction and real estate. The
moving on acquisition targets during the global                    velocity of the recovery in commodity demand in
financial crisis. Additionally, BHP’s planned capital              China had surprised BHP (particularly where imports
and exploration expenditure for the 2010FY is                      have replaced higher cost domestic production, eg in
                                                                   iron ore).

After intensive de-stocking, there is emerging                     re-stocking or a combination of re-stocking and
evidence of demand improving in North America,                     real demand”. Real demand following the stimulus
Europe and Japan (again, re-stocking in Europe and                 spending will be the key to a sustainable price
Japan has started a little earlier than BHP expected).             recovery. Further improvements in commodity prices
BHP has maintained its view that “it is too early to               in the short term are likely to trigger supply
tell whether this improvement is driven only by a                  responses from idle industry capacity. From current
                                                                                                   BHP Billiton Ltd

levels, BHP does not expect significant price reaction   In the long term, BHP continues to expect strong
(ie further price rises) in response to improving        commodity demand growth from China (and India).
conditions in the short term.

BHP/RIO Iron Ore Production JV                           benefits of the proposed transaction (as well as the
                                                         arguments by the steel industry).
On 5 December 2009, BHP Billiton and Rio Tinto
signed binding agreements on the proposed                Taking into account all regulatory review processes
production joint venture covering the entirety of        and shareholder approvals, BHP Billiton and Rio Tinto
both companies' WA iron ore assets.                      now anticipate completion of the JV in the December
                                                         half of 2010 (rather than earlier expectations of
The companies have also filed submissions with the       mid-2010).
European Commission (EC) and the Australian
Competition and Consumer Commission in relation to       The production joint venture encompasses all current
the proposed joint venture.          The companies       and future WA iron ore assets and liabilities and will
understand that the EC will review the production        be owned 50:50 by BHP and RIO. Both believe the
joint venture under Article 101 of its merger rules      net present value of the production and
(formerly Article 81). This means it will be reviewed    development synergies will be in excess of US$10
under the less onerous test of an operating joint        billion (on a 100% basis; minority JV partners will
venture, rather than a full function joint venture.      marginally reduce the synergies realised by RIO/BHP).
Whilst this is likely to increase the chances of the     As previously outlined, these synergies are anticipated
deal being approved, many groups have recently           to come from:
reiterated their opposition. Eurofer, the European          Combining      adjacent    mines     into     single
Federation of Iron and Steel Industries, has said that       operations;
the joint venture “will lead to unavoidable market
concentration and increased pricing power, which is         Reducing costs through shorter rail hauls and
unacceptable in competition terms”.           Eurofer,       more efficient allocations of port capacity;
Worldsteel and steel majors will argue that control of      Blending opportunities which will maximise
supply provides unacceptable market power.                   product recovery and provide further operating
BHP and RIO had previously advised that both                 efficiencies;
companies will market output separately - there will        Optimising future growth opportunities through
not be any joint marketing of iron ore (for 15% of           the development of consolidated, larger and
output - the only significant change since the initial       more capital efficient expansion projects; and
announcement on 5 June 2009). The proposed joint
venture aims to produce more iron ore at lower cost         Combining the management, procurement and
with customers sharing some of the benefit. Under            general overhead activities into a single entity.
Article 101, the EC will have to consider these
BHP Billiton Ltd

We view the proposed production joint venture as                                       86% share in the Worsley alumina refinery in Australia.
offering valuation upside for both BHP and RIO –                                       Smelters: 100% in Bayside and Hillside smelters, South
the synergy benefits would not currently be part of                                    Africa; a 46% interest in the Alumar smelter, Brazil; a
                                                                                       47.6% stake in the Mozal aluminium smelter in
base case valuations for either company. The
market is obviously aware that any EC approval
requiring infrastructure-related asset sales would                                     Base Metals: Copper: Escondida mine Chile (57.5% int.);
reduce the anticipated synergy benefits.                                               wholly-owned Cerro Colorado. Antamina copper-zinc
                                                                                       mine in Peru (33.75%), Olympic Dam SA, Cannington
In order to equalise the contribution value of the two                                 silver/lead/zinc mine Qld; the Spence copper project, Chile;
companies, BHP will pay RIO US$5.8b for equity type                                    proprietary bioleaching technology.
interests at financial close (adjusted for respective
                                                                                       Energy Coal: Largest producer of export steaming coal.
cash contributions). Senior management of the                                          Operations in South Africa (Ingwe, 100% owned), Australia
entity will be determined jointly on merits with                                       (100%, Mount Arthur North) & Colombia (33% in
broadly equal participation from RIO and BHP.                                          Carbones de Cerrejon ("CDC") & Cerrejon Zone Norte
                                                                                       ("CZN")). Kalimantan Coal (80%), New Mexico, US (100%).

Activities                                                                             Stainless Steel Materials: Ferronickel: Cerro-Matoso,
                                                                                       Colombia; Nickel/cobalt: Yabulu, Nickel West, Australia.
BHP Billiton is a Dual Listed Company, comprised of BHP
Billiton Ltd and BHP Billiton plc, which are separate legal                            Diamonds and Specialty Products: Ekati diamond mine,
entities with separate share listings, managed on a unified                            Canada (80% int), Richards Bay Minerals (50%),
basis.                                                                                 Exploration & Technology.

Iron Ore: Mt Newman, Yandi, Mt Goldsworthy, Area C,
Jimblebar in WA – all 85% int., Whyalla mines, Samarco,
Brazil (50%).
                                                                                       BHP Dividend History (2 Years)
                                                                                              Date Paid                  Amount (c)    Franking (%)
Metallurgical Coal: Metcoal Holdings equally owned by
                                                                                              17/03/09                     64.95           100
BHP Billiton & Mitsubishi; Central Queensland Coal
                                                                                              25/09/08                     46.90           100
Associates (50%), Gregory (50%); BHP Mitsui Coal (80%);
                                                                                              18/03/08                     31.94           100
Illawarra Collieries.
                                                                                              28/09/07                     33.63           100
Manganese: Samancor (60% interest); Groote Eylandt
Mining Co ("GEMCO) and Tasmanian Electro Metallurgical
Company ("TEMCO”).                                                                     Important Dates (Approx.)
Petroleum: Bass Strait (50% interest), NW shelf (16.7% in
                                                                                            Final Result           Shares Ex-Final     Final Dividend
LNG phase, 8.3% domestic gas phase), Timor Sea
                                                                                            Announced                 Dividend              Paid
(Laminaria/Corallina oil fields); Stybarrow (50%); Gulf of
Mexico (various interests); Angostura; Liverpool Bay, UK                                     12 August                   31 August     25 September
(46.1%); Zamzama, Pakistan (38.5%); Ohanet, Algeria                                      Half Year Result        Shares Ex-Interim    Interim Dividend
(45%); ROD, Algeria (36%).                                                                 Announced                 Dividend               Paid
Aluminium: Refineries: 36% interest in the Alumar                                           10 February              23 February         17 March
refinery in Brazil; a 45% share in a refinery in Suriname;

F.W. Holst & Co. Pty. Ltd.                                                                                                               Rob Craigie
This publication has been prepared by F W Holst & Co. Pty Ltd ABN 67 006 545 660 (“HOLST”) Australian Financial Services Licensee No.
247841 for its clients and must not be copied in any way or distributed to any other person without the written authorisation of HOLST. This
publication provides general advice only and has not been prepared taking into account your financial situation, investment objectives and
particular needs. Before acting on the general advice contained in this publication, you should obtain individual expert financial advice
suitable to your needs and objectives. Nothing in this publication shall be construed as a solicitation to buy or sell or engage in or refrain
from engaging in any transaction. The HOLST research analyst is responsible for the content of this publication and certifies that all of the
views expressed reflect the analyst's personal views about the security at the time of writing. The opinions, forecasts and recommendations
expressed are subject to change without notice. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the
opinion, forecasts or recommendation expressed by the analyst in this report. HOLST, its directors and associates may hold an interest in
financial products and may effect transactions, which may not be consistent with the recommendation in this publication. HOLST, its
directors and associates may or has received brokerage, commission, fees or may receive other benefits on transactions and/or holdings in the
financial products mentioned in this publication. HOLST has made every effort to ensure the information in this publication is accurate and
takes no responsibility for any losses incurred as a result of any errors or omissions in data on which this document is based.
Rob Craigie and/or associated parties own or have an interest in the securities of BHP Billiton Ltd and Rio Tinto Ltd.

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